Small Business Loan Do’s and Don’ts

If you thought that navigating a competitive marketplace was challenging, then it can seem like a proverbial picnic compared to trying to get clear answers regarding small business loans. Indeed, whether it’s banks with an excessive amount of small print that requires a PhD in Legaleze, or sketchy lenders who offer loans that seem too good to be true (guess what: they are), trying to separate fact from fiction can be frustrating, to say the least.

 

Fortunately, there are some honest players out there who understand the difference between educating and selling. According to National Business Capital, here are some essential small business loan do’s and don’ts that you definitely want to know before you sign on the dotted line (or affix your e-sig on the digital line):

 

Small Business Loan Do’s

 

  • DO explore whether it makes more sense to get a business line of credit instead of a small business loan. Having dead money in your account is costly. A business line of credit basically works like a credit card, and you’ll only pay for the funds you borrow – not the full amount of credit available.

 

  • DO not get talked into something you don’t want. A lender that pushes you to apply for a bigger loan than you need isn’t on your side – and you should walk away. You’re better off taking a smaller loan now and applying for another one down the road vs. biting off more than you can chew, since it’ll end up costing you.

 

  • DO explore the alternative lending marketplace, so that you can get a full picture of your available options, including working capital loans, merchant cash advances, and so on. Sometimes your bank might not want to work with you, and frankly, sometimes you may not want to work with them (especially if you don’t want to pledge collateral or wait months for your application to snake its way through the process).

 

Small Business Loan Don’ts

 

  • DON’T underestimate the total cost of borrowing. Yes, interest is a big part of this – but it’s typically not going to be the full story. For example, there might be closing costs, service charges, and so on. A legitimate, trustworthy lender will lay out all of these costs out for you, and ensure that you clearly understand what’s in store. If not, then head for the exit ASAP.

 

  • DON’T assume that your collateral will be evaluated fairly. If you apply for a secured loan, there’s a very good chance that your lender will deem your assets as being worth significantly less than market rate. Why do they do this? Because they can, and because it reduces their risk. Is this fair and ethical? No and no.

 

  • DON’T assume that you can repay your loan back early to save some interest. With a bank loan, you’ll incur early payment penalties, since your financially responsible gesture will eat into their expected profits. Many types of loans in the alternative lending space, however, can be paid back ahead of time without any fees.

The Bottom Line

Running a small business is hard – but learning about the do’s and don’ts of small business loans shouldn’t be. The above will help you get a sense of what the landscape looks like, so that you can move forward, ask smart questions, and empower yourself with knowledge to make a financing decision works best for your business.

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